Philip Morris As A Top Pick: The Five Reasons To Buy According To Morgan Stanley

Morgan Stanley analyst Pamela Kaufman reiterated an Overweight rating on the shares of Philip Morris International Inc PM with a price target of $118.

The analyst lists five reasons for investors to buy Philip Morris, which is the analyst's new top pick. The points are as follows.

Accelerating IQOS adoption trends supported by ILUMA rollout. ILUMA is driving an accelerated upgrade cycle among existing IQOS users and attracting new users as the device addresses many prior IQOS pain points, including ease of use, cleanliness, and a more consistent heating experience.

Rapid Zyn growth in the U.S.  Rapid growth of nicotine pouches Zyn in the U.S., with an opportunity for international expansion.

There is a further runway for distribution growth in the U.S. in the Eastern part of the country where Zyn underindexes and its overall distribution reach is still about 7% below traditional smokeless tobacco brands.

Attractive U.S. opportunity for IQOS with measured investment spending. IQOS in the U.S. will conservatively contribute an incremental mid-to high-single-digit percentage to PM's EPS as IQOS captures about 6% market share in the U.S. by 2030 and grows to 10% share within 10 years of its launch.

The analyst expects PM's investment spend in the U.S. to be measured as PM can leverage its past experience with rolling out IQOS across over 70 markets internationally and leverage SWMA's sales footprint.

Opportunity for margin expansion in 2024/2025. The combination of strong topline growth, opportunity for cost savings, and operating leverage should drive an 8.5% 2022-25 EPS CAGR.

Attractive Valuation. PM's valuation is attractive as it is trading at a discount to Staples peers despite its improving business mix, strong pricing power, U.S. expansion opportunity, and attractive topline/EPS growth profile.

The analyst sees potential for multiple expansions if investors begin to give PM credit as an ESG rate of change story and see PM's upcoming analyst day in September as a positive catalyst for the stock.

Price Action: PM shares are trading higher by 1% at $97.18 on the last check Thursday.